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© 2014 Pearson Canada Inc.
Accounting, Vol. 2, 9e Cdn. Ed. (Horngren)
Chapter 13 Corporations: Share Capital and the Balance Sheet
Objective 13-1
1) A corporation is a separate legal entity apart from its owners.
Answer: TRUE Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
2) Shareholders in a corporation are personally liable for the debts of the corporation.
Answer: FALSE Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
3) All shares issued by a corporation have voting rights.
Answer: FALSE Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
4) Double taxation refers to the fact that a corporation pays tax on its taxable earnings and the
shareholder also pays personal tax on all of the corporation's taxable income.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
5) It is easier to achieve continuous life using the corporate structure for an organization.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Comprehension
Objective: 13-1 Identify the characteristics of a corporation
6) Unlimited liability is one of the advantages of the corporate structure for an organization.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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7) Mutual agency is one of the disadvantages of the corporate structure for an organization.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
8) The most that a shareholder can lose on an investment in a corporation's shares is the cost of the
investment.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
9) Corporations pay the same taxes as partnerships and proprietorships.
Answer: FALSE
Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
10) Retained earnings is debited to transfer net income to the retained earnings account during the closing
process.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
11) Retained earnings represents investments by the shareholders of the corporation.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
12) A debit balance in retained earnings is referred to as a deficit.
Answer: TRUE
Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
13) The policy-making body of a corporation is called the board of directors.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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14) Corporate bylaws are established by provincial governments to regulate company operations in the
interest of the public.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
15) The document(s) used by a government to grant permission to form a corporation is called (a):
A) proxy
B) articles of incorporation
C) share certificate
D) bylaw agreement
Answer: B
Diff: 1 Type: MC
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
16) All of the following represent advantages of corporations over other business entities except:
A) unlimited shareholders' liability
B) continuity of existence
C) separate legal entity
D) ease of transferring ownership
Answer: A Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
17) Which of the following statements describing a corporation is true?
A) Shareholders are the creditors of a corporation.
B) Shareholders own the business and manage its day-to-day operations.
C) A corporation is subject to greater governmental regulation than a proprietorship or a partnership.
D) When ownership of a corporation changes, the corporation terminates.
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
18) Which of the following forms of business organizations is a distinct legal entity?
A) partnership
B) corporation
C) proprietorship
D) only proprietorship and partnership
Answer: B Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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19) Shareholders' liability for corporation debts is generally limited to:
A) the cost of their investment
B) the market value of the shares
C) the par value of the shares
D) total shareholders' equity
Answer: A
Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
20) Which of the following is a disadvantage of the corporate form of business organization?
A) mutual agency
B) government regulation
C) limited liability
D) difficulty in transferring ownership
Answer: B Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
21) Which of the following forms of business organizations terminates when the ownership structure
changes?
A) corporation
B) partnership
C) share capital
D) shareholders' equity
Answer: B Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
22) Share capital represents:
A) investments by the creditors of a corporation
B) capital that the corporation has earned through profitable operations
C) investments by the shareholders of a corporation
D) retained earnings
Answer: C Diff: 1 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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23) Retained earnings:
A) is classified as an asset on the corporate balance sheet
B) is part of contributed capital
C) represents investments by the shareholders of the corporation
D) represents capital earned by profitable operations
Answer: D
Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
24) The owners of a corporation are referred to as:
A) creditors
B) shareholders
C) partners
D) debtors
Answer: B Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
25) All of the following transactions increase shareholders' equity except:
A) issuance of common shares
B) profitable operations
C) declaration of a cash dividend
D) issuance of convertible preferred shares
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
26) A profitable corporation would close out Income Summary by:
A) debiting Income Summary and crediting Share Capital
B) debiting Income Summary and crediting Retained Earnings
C) crediting Income Summary and debiting Retained Earnings
D) crediting Income Summary and debiting Share Capital
Answer: B Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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27) A corporation operating at a loss would close out Income Summary by:
A) debiting Income Summary and crediting Retained Earnings
B) debiting Income Summary and crediting Share Capital
C) crediting Income Summary and debiting Retained Earnings
D) crediting Income Summary and debiting Share Capital
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
28) A debit balance in retained earnings is referred to as a(n):
A) normal balance
B) asset
C) deficit
D) liability
Answer: C Diff: 1 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
29) Cash dividends:
A) do not affect the retained earnings of a corporation
B) decrease both the assets and the total shareholders' equity of the corporation
C) increase retained earnings
D) increase the assets and decrease the total shareholders' equity of the corporation
Answer: B
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
30) All of the following are basic rights of a common shareholder except:
A) the right to receive a proportionate share of the corporate assets remaining after the corporation pays
its liabilities in liquidation
B) the right to receive a proportionate share of the corporate assets prior to the payment of liabilities in
liquidation
C) the right to receive a proportionate share of any dividend
D) the right to vote
Answer: B Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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31) The heading, contributed capital, appears on which section of the balance sheet?
A) current assets
B) long-term liabilities
C) property, plant and equipment
D) shareholders' equity
Answer: D
Diff: 1 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
32) Which of the following statements describes the corporate characteristic termed limited liability?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the
corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on
corporate dividends and gains from sale of stock.
Answer: A
Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
33) Which of the following statements describes the corporate characteristic termed double taxation?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the
corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on
corporate dividends and gains from sale of stock.
Answer: D Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
34) Which of the following statements describes the corporate characteristic termed no mutual agency?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the
corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on
corporate dividends and gains from sale of stock.
Answer: C Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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© 2014 Pearson Canada Inc.
Table 13-9
Following is the JenWu Corporation December 31, 2015 shareholders' equity section of the balance sheet,
prior to the closing entries:
Contributed capital:
Preferred shares, cumulative, $5.00, 6,000 shares outstanding,
liquidation value $42 per share $220,000
Common shares, 30,000 shares outstanding 500,000
Retained earnings/(deficit) (240,000)
Note: No dividends were declared in 2013 or 2014. The net income for 2015 was $260,000.
35) Referring to Table 13-9, what is the journal entry to close the Income Summary account?
A)
Dr. Retained Earnings 260,000
Cr. Income Summary 260,000
B)
Dr. Retained Earnings 350,000
Cr. Preferred Dividend Payable 90,000
Cr. Income Summary 260,000
C)
Dr. Income Earnings 260,000
Cr. Retained Earnings 260,000
D)
Dr. Income Summary 260,000
Cr. Preferred Dividend Expense 90,000
Cr. Retained Earnings 170,000
Answer: C Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-1 Identify the characteristics of a corporation
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Match the following.
A) common shares
B) outstanding shares
C) shareholders' equity
D) board of directors
E) President
F) limited liability
G) deficit
H) organization costs
I) retained earnings
J) underwriter
K) authorization of shares
L) articles of incorporation
M) corporate law firm
36) Documents used by a government to grant its permission to form a corporation Diff: 1 Type: MA
Learning Outcome:
Skill: Knowledge
A-03 Analyze and record transactions and their effect on the financial statements
Objective: 13-1 Identify the characteristics of a corporation
37) Chief operating officer in charge of managing the day-to-day operations of a corporation. Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
38) Owners' equity of a corporation Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
39) Shares in the hands of shareholders
Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
40) Group elected by the shareholders to set policy for a corporation and to appoint its officers.
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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41) Provision in the articles of incorporation that permits a corporation to sell a certain number of shares
of stock.
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
42) Debit balance in the retained earnings account Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
43) The costs of organizing a corporation, including legal fees, taxes, and charges by promoters for selling
the shares.
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
44) No personal obligation of a shareholder for corporation debts. The most that a shareholder can lose on
an investment in a corporation's shares is the cost of the investment.
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
45) A corporation's capital that is earned through profitable operation of the business
Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
46) The most basic form of share capital Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
47) The firm engaged to sell shares on behalf of the issuing corporation Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
Answers: 36) L 37) E 38) C 39) B 40) D 41) K 42) G 43) H 44) F 45) I 46) A 47) J
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48) Discuss the characteristics of a corporation. Indicate, wherever appropriate, if the characteristic is an
advantage or a disadvantage of the corporate form of business.
Answer:
Students should mention the following characteristics:
Separate legal entity
Ability to raise more capital-advantage
Continuous life-advantage
Ease of ownership transfer-advantage
No mutual agency - advantage
Limited liability of shareholders - advantage
Separation of management and owners - disadvantage
Possible double taxation - disadvantage
Government regulation - disadvantage
Additional costs unique to corporations - disadvantage Diff: 2 Type: ES
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Comprehension
Objective: 13-1 Identify the characteristics of a corporation
49) List some of the shareholder rights normally attached to common shares.
Answer: -The right to sell the shares
-The right to vote at shareholders' meetings
-The right to receive a proportionate share of any dividends declared by the directors
-The right to receive a proportionate share of any assets on the winding-up of the company, after
the creditors and any higher ranking classes of shares have been paid.
-The right to maintain one's proportionate ownership in the corporation.
Diff: 2 Type: ES
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-1 Identify the characteristics of a corporation
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Objective 13-2
1) No-par-value shares are shares of stock that do not have a value assigned to them by the articles of
incorporation.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
2) Preferred shares normally have no voting rights.
Answer: TRUE Diff: 1 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
3) When a corporation issues shares in exchange for noncash assets, the noncash assets are debited for
their book value.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
4) The shareholders' equity section of a balance sheet lists common shares first, followed by preferred
shares second, and retained earnings last.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
5) Organization costs are intangible assets classified with property, plant and equipment.
Answer: FALSE
Diff: 1 Type: TF
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
163
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6) Increases in contributed capital and in retained earnings come from producing revenue.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Comprehension
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
7) Convertible preferred shares must be converted into common shares when the corporation declares the
conversion.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
8) If a company has both preferred and common shares outstanding, the preferred shareholders have the
first claim to shareholders' equity.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
9) Convertible preferred shares may be exchanged for another specified class of shares in the corporation
if the preferred shareholder chooses.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
10) Corporations may use an underwriter to sell their shares rather than selling them directly to investors.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
164
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11) Which of the following is a priority granted to preferred shareholders?
A) voting for the corporate board of directors
B) receiving assets before creditors if the corporation liquidates
C) receiving dividends before common shareholders
D) receiving a guaranteed fixed dollar amount of dividends each year
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
12) A corporation may issue:
A) common shares and preferred shares
B) preferred shares but not common shares
C) common shares but not preferred shares
D) either common shares or preferred shares but not both
Answer: A Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
13) Why might corporations prefer issuing preferred shares to debt?
A) dividends are payable at the discretion of the corporation
B) debt payments are payable at the discretion of the corporation
C) dividends are tax deductible to the corporation
D) interest expense is tax deductible to the corporation
Answer: A
Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
14) An owner investment of cash in a corporation increases:
A) assets and increases liabilities
B) one asset and decreases another asset
C) assets and decreases shareholders' equity
D) assets and increases shareholders' equity
Answer: D Diff: 1 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
165
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15) The entry to record the issuance of 5,000 common shares for $12.50 per share includes a:
A) debit to Retained Earnings for $62,500
B) debit to Cash for $62,500
C) credit to Retained Earnings for $62,500
D) debit to Common Shares for $62,500
Answer: B
Diff: 1 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
16) The entry to record the issuance of 6,000 common shares for $12.50 per share includes a:
A) credit to Cash for $75,000
B) debit to Common Shares for $75,000
C) credit to Common Shares for $75,000
D) credit to Retained Earnings for $75,000
Answer: C Diff: 1 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
17) The entry to record the issuance of 55,000 common shares at $13.50 per share includes a:
A) credit to Retained Earnings $742,500
B) credit to Cash for $742,500
C) debit to Retained Earnings for $742,500
D) credit to Common Shares for $742,500
Answer: D Diff: 1 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
18) When 35,000 common shares are issued at $16.50 per share, total contributed capital:
A) increases by $577,500
B) increases by $350,000
C) increases by $227,500
D) decreases by $577,500
Answer: A
Diff: 1 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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19) Land is acquired by issuing 500 common shares. The land has a current market value of $12,000.
There is no market value for the common shares available. The journal entry requires a:
A) debit to Cash for $12,000
B) debit to Common Shares for $12,000
C) credit to Retained Earnings for $12,000
D) credit to Common Shares for $12,000
Answer: D Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
20) A corporation issues common shares in exchange for equipment with a market value of $15,000. This
transaction would:
A) increase retained earnings by $15,000
B) increase liabilities by $15,000
C) increase common shares by $15,000
D) decrease total shareholders' equity by $15,000
Answer: C Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
21) Accounting for the incorporation of an unincorporated going business involves:
A) closing the owner equity accounts of the prior entity and setting up the shareholder equity accounts of
the corporation
B) leaving the owner equity accounts as is and setting up the shareholders' equity accounts for the
corporation
C) closing the owner equity accounts of the prior entity to the retained earnings account of the
corporation
D) closing the withdrawals accounts to the dividends payable accounts
Answer: A Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
167
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22) Organization costs appear on which section of the balance sheet?
A) current assets
B) intangible assets
C) shareholders' equity
D) long-term liabilities
Answer: B
Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
Table 13-1
The following selected list of accounts with their normal balances was taken from the general ledger of
Grant Corporation as of December 31, 2014:
Cash $173,500
Common shares, 100,000 shares authorized, 50,000 shares issued 190,000
Retained earning 131,500
Cash dividends payable 25,000
Preferred shares, 200,000 shares authorized 100,000 shares
issued 500,000
23) Refer to Table 13-1. The average issue price of a common share was:
A) $3.80
B) $1.90
C) $5.00
D) $0.95
Answer: A Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
24) Refer to Table 13-1. The average issue price of a preferred share was:
A) $2.50
B) $6.90
C) $5.00
D) $3.80
Answer: C Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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25) Refer to Table 13-1. Which account should be listed first in the shareholders' equity section?
A) Retained earnings
B) Common shares
C) Contributed surplus
D) Preferred shares
Answer: D
Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
26) Refer to Table 13-1. The total shareholders' equity as of December 31, 2014 was:
A) $190,000
B) $846,500
C) $881,500
D) $821,500
Answer: D Diff: 3 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
Table 13-6
The following selected list of accounts with their normal balances was taken from the general ledger of
Gore Ltd. as of December 31, 2014:
Cash $199,000
Common shares, 10,000 shares authorized, 5,000 shares issued 265,000
Retained earnings 131,5000
Cash dividends payable 20,000
Preferred shares, 500,000 shares authorized 100,000 shares
issued 800,000
27) Refer to Table 13-6. Which account should be listed first in the shareholders' equity section?
A) Retained earnings
B) Common shares
C) Contributed surplus
D) Preferred shares
Answer: D Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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28) Notebook Company had the following transactions in 2013, its first year of operations.
• Issued 2,000 common shares. Shares were issued at $50.00 per share.
• Issued 100 preferred shares. Shares were issued at $100 per share.
• Earned net income of $95,000.
• Paid dividends of $5,000.
At the end of 2013, how much was the total Shareholders' equity?
A) $200,000
B) $110,000
C) $90,000
D) $100,000
Answer: A
Explanation: A) Calculations: (2,000 × $50) + (100 × $100) + ($95,000 - $5,000) = $200,000 Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
29) Overton Company had the following transactions in 2013, its first year of operations.
• Issued 5,000 common shares at $30.00 per share.
• Earned net income of $200,000.
• Paid dividends of $5.00 per share.
At the end of 2013, how much is the total contributed capital?
A) $150,000
B) $325,000
C) $175,000
D) $200,000
Answer: A
Explanation: A) Calculations: (5,000 × $30) = $150,000
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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30) Beta Company was founded in 2014. Its yearly earnings and dividend payments are shown here:
2012: Net income $4,000, paid zero dividends
2013: Net income $20,000, paid $10,000 dividends
2014: Net income of $8,000, paid $5,000 dividends
2015: Net loss of $22,000, paid zero dividends
At the end of 2015, which of the following statements would be accurate?
A) Beta has a cumulative operating loss.
B) Beta has a retained earnings deficit.
C) Beta has retained earnings surplus.
D) Beta has negative contributed capital.
Answer: B
Explanation: B) Calculation: $4,000 + $20,000 - $10,000 + $8,000 -$5,000 - $22,000 = $(5,000)
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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Match the following.
A) preferred shares
B) convertible
C) par value
D) no-par-value shares
E) amortization
F) cumulative
G) liquidation value
31) Shares that do not have a value assigned to them by the articles of incorporation
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
32) Shares of stock that gives its owners certain advantages over the common shareholders. Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
33) The amount a preferred shareholder would receive for their shares in the event the corporation is
liquidated Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
34) Preferred shares that can be exchanged by the preferred shareholders
Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
35) The method of recognizing organization costs under ASPE Diff: 1 Type: MA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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36) An arbitrary value assigned to each share in the articles of incorporation Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
Answers: 31) D 32) A 33) G 34) B 35) E 36) C
37) Prepare a journal entry for each of the following transactions.
a) Masters Corporation sells 10,000 common shares for $13.25 per share.
b) Masters Corporation sells 5,000 shares of $5, cumulative preferred shares for $55 per share.
c) Received a building with a market value of $160,000, and issued 6,400 common shares in exchange.
d) Masters Corporation reports a net income for the current year of $56,000. Prepare the entry to close
the income summary account.
Date Accounts Debit Credit
Answer:
Date Accounts Debit Credit
a) Cash 132,500
Common Shares 132,500
b) Cash 275,000
Preferred Shares 275,000
d) Building 160,000
Common Shares 160,000
e) Income Summary 56,000
Retained Earnings 56,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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38) Prepare a journal entry for each of the following transactions.
a) Struthers Corporation sells 100,000 common shares for $4.50 per share.
b) Struthers Corporation sells 6,000 shares of $3, cumulative preferred shares for $70 per share.
c) Received equipment with a market value of $60,000, and issued 12,400 common shares in exchange.
d) Struthers Corporation reports a net income for the current year of $241,000. Prepare the entry to close
the income summary account.
Date Accounts Debit Credit
Answer:
Date Accounts Debit Credit
a) Cash 450,000
Common Shares 450,000
b) Cash 420,000
Preferred Shares 420,000
d) Equipment 60,000
Common Shares 60,000
e) Income Summary 241,000
Retained Earnings 241,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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39) Prepare journal entries for the following transactions reported by Evans Corporation for the month of
May:
May 1 Issued 35,000 common shares at $15 per share.
21 Issued 1,400 shares of $5, cumulative preferred shares for a total of
$144,200.
28 Exchanged 5,000 common shares for a patent valued at $82,000.
31 Jet Corporation reported a net loss for May amounting to $10,500.
Prepare the entry to close the income summary account.
Date Accounts Debit Credit
Answer:
Date Accounts Debit Credit
May 1 Cash 525,000
Common Shares 525,000
21 Cash 144,200
Preferred Shares 144,200
28 Patent 82,000
Common Shares 82,000
31 Retained Earnings 10,500
Income Summary 10,500
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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40) From the following alphabetical list of selected accounts taken from the general ledger of Dorlin
Corporation as of December 31, 2014, select the accounts that are part of shareholders' equity. Then
prepare the shareholders' equity section of the balance sheet on December 31, 2014.
Accounts receivable 50,000
Cash dividends payable 20,000
Common shares, 20,000 shares outstanding 550,000
Inventory 75,000
Note payable 25,000
Notes receivable 20,000
Preferred shares, $10 cumulative,
1,000 shares outstanding 250,000
Retained earnings 250,000
Unearned revenue 15,000
Answer: Dorlin Corporation
Partial Balance Sheet
December 31, 2014
Shareholders' equity
Contributed capital:
Preferred shares, $10, cumulative,
1,000 shares outstanding $ 250,000
Common shares, 20,000 shares outstanding 550,000
Total contributed capital 800,000
Retained earnings 250,000
Total shareholders' equity $1,050,000
Diff: 3 Type: SA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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41) Nevada Corporation was created on January 2, 2014. The articles of incorporation from the
Government of Canada authorize Nevada Corporation to issue an unlimited number of common shares
and 500,000 shares of $0.50 preferred shares. The company had the following transactions:
2014
Jan. 2 Gave 5,000 common shares to the corporation's legal firm for incorporating the business.
The total legal fee was $5,000.
3 Issued 200,000 common shares for cash at $1 per share.
4 Issued 10,000 preferred shares for cash at $10 per share.
4 Exchanged $50,000 cash and 200,000 common shares for a building with a market value of
$260,000.
Dec. 31 Close Income Summary to Retained Earnings assuming that Nevada had $63,000 of net
income for the year
a) Journalize the above transactions. Explanations are not needed.
b) Prepare the shareholders' equity section of the balance sheet as of the close of business on December
31, 2014.
Journal
Date Description Debit Credit
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Answer: Journal
Date
2010 Description Debit Credit
Jan. 2 Organization Costs 5,000
Common Shares 5,000
Jan. 3 Cash 200,000
Common Shares 200,000
Jan. 4 Cash 100,000
Preferred Shares 100,000
Jan. 4 Building 260,000
Cash 50,000
Common Shares 210,000
Dec. 31 Income Summary 63,000
Retained Earnings 63,000
Nevada Corporation
Partial Balance Sheet
December 31, 2014
Shareholders' Equity
Contributed capital
Preferred shares,$0.50, 500,000 shares authorized,
10,000 shares issued $ 100,000
Common shares, unlimited number of shares
authorized, 405,000 shares issued 415,000
Total contributed capital 515,000
Retained earnings 63,000
Total shareholders' equity $578,000
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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Table 13-11
The following accounts and related balances of ETH Engineering Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Trademark, net $ 17,000
Preferred Shares, $2.50, 20,000 authorized and issued 200,000
Cash 320,000
Accounts Receivable, net 265,000
Accrued Liabilities 42,000
Long-term Note Payable 500,000
Inventory 350,000
Retained Earnings/(Deficit) (1,197,000)
Accounts Payable 75,000
Interest Expense 35,000
Property, Plant, and Equipment, net 2,800,000
Common Shares, 300,000 shares authorized; 175,000 shares
issued 3,500,000
Prepaid Expenses 3,000
Organization Costs 15,000
Additional information:
Total Assets, January 1, 2014 $ 3,200,000
Net income for 2014 $ 650,000
No new shares were issued in 2014.
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42) Referring to Table 13-11, prepare a classified balance sheet as at December 31, 2014.
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Answer: ETH Engineering Ltd.
Balance Sheet
December 31, 2014
Assets
Current Assets:
Cash $ 320,000
Accounts Receivable, net 265,000
Inventory 350,000
Prepaid Expenses 3,000
Total Current Assets $ 938,000
Property, Plant, and Equipment, net 2,800,000
Intangible Assets:
Trademark, net $ 17,000
Organization Costs 15,000
Total Intangible Assets 32,000
Total Assets $ 3,770,000
Liabilities
Current Liabilities:
Accounts Payable $ 75,000
Accrued Liabilities 42,000
Total Current Liabilities $ 117,000
Long-term Note Payable 500,000
Total Liabilities $ 617,000
Shareholders' Equity
Preferred Shares, $2.50, cumulative, 20,000 authorized and
issued $ 200,000
Common Shares, 300,000 shares authorized; 175,000 shares
issued 3,500,000
Retained Earnings/(Deficit) (547,000)
Total Shareholders' Equity 3,153,000
Total Liabilities and Shareholders' Equity $ 3,770,000
Diff: 3 Type: SA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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Table 13-12
The following accounts and related balances of FYI Advertising Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Accrued Liabilities $ 50,400
Preferred Shares, $2.50, cumulative, 24,000 authorized and
issued 240,000
Prepaid Expenses 3,600
Accounts Payable 90,000
Trademark, net 20,400
Long-term Note Payable 600,000
Property, Plant, and Equipment, net 3,360,000
Retained Earnings 623,600
Accounts Receivable, net 318,000
Interest Expense 29,000
Inventory 420,000
Common Shares, 300,000 shares authorized; 200,000 shares
issued 2,500,000
Cash 384,000
Organization Costs 18,000
Additional information:
Total Assets, January 1, 2014 $ 4,100,000
Net income for 2014 $ 420,000
No new shares were issued in 2014.
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43) Referring to Table 13-12, prepare a classified balance sheet as at December 31, 2014.
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Answer: FYI Advertising Ltd.
Balance Sheet
December 31, 2014
Assets
Current Assets:
Cash $ 384,000
Accounts Receivable, net 318,000
Inventory 420,000
Prepaid Expenses 3,600
Total Current Assets $ 1,125,600
Property, Plant, and Equipment, net 3,360,000
Intangible Assets:
Trademark, net $ 20,400
Organization Costs 18,000
Total Intangible Assets 38,400
Total Assets $ 4,524,000
Liabilities
Current Liabilities:
Accounts Payable $ 90,000
Accrued Liabilities 50,400
Total Current Liabilities $ 140,400
Long-term Note Payable 600,000
Total Liabilities $ 740,400
Shareholders' Equity
Preferred Shares, $2.50, cumulative, 24,000 authorized and
issued $ 240,000
Common Shares, 300,000 shares authorized; 200,000 shares
issued 2,500,000
Retained Earnings 1,043,600
Total Shareholders' Equity 3,783,600
Total Liabilities and Shareholders' Equity $ 4,524,000
Diff: 3 Type: SA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 13-2 Record the issuance of shares and prepare the shareholders' equity section of a corporation's balance
sheet
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Objective 13-3
1) Dividends distributed increase the assets and decrease the retained earnings of the business.
Answer: FALSE
Diff: 1 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
2) Cash dividends decrease both the assets and the retained earnings of a corporation.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
3) The entry on the payment date for a cash dividend involves a debit to retained earnings and a credit to
cash.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
4) Dividends become a liability of the corporation on the declaration date.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
5) Dividends in arrears on cumulative preferred shares are not a liability to the corporation.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
6) Dividends payable are normally a long-term liability.
Answer: FALSE
Diff: 1 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
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7) In order to receive a cash dividend, an investor must own the share by the payment date.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
8) The declaration date and the payment date of a cash dividend are the same thing.
Answer: FALSE
Diff: 1 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
9) Dividends cannot accumulate for common shares.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
10) If the preferred shares are not designated as cumulative, the corporation is obligated to pay any
dividends in arrears.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
11) Dividends become a liability of the corporation:
A) on the payment date
B) on the date of record
C) on the declaration date
D) on the day immediately following the date of declaration
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
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12) The dividends payable liability of the corporation is eliminated:
A) on the payment date
B) on the date of record
C) on the declaration date
D) on the day immediately following the date of declaration
Answer: A
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
13) The entry to record the declaration of a $0.50 per share dividend on 12,500 outstanding common
shares requires a:
A) credit to Cash for $6,250
B) debit to Dividends Payable for $6,250
C) debit to Retained Earnings for $6,250
D) credit to Retained Earnings for $6,250
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
14) The entry to pay a previously declared dividend of $0.50 per share on 12,500 outstanding common
shares requires a:
A) debit to Cash for $6,250
B) credit to Dividends Payable for $6,250
C) debit to Retained Earnings for $6,250
D) debit to Dividends Payable for $6,250
Answer: D
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
15) The declaration of a dividend:
A) increases total shareholders' equity
B) reduces total assets
C) increases total assets
D) increases total liabilities
Answer: D Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Comprehension
Objective: 13-3 Account for cash dividends
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16) The payment of a dividend:
A) reduces total shareholders' equity
B) increases total shareholders' equity
C) reduces total liabilities
D) has no effect on total assets
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Comprehension
Objective: 13-3 Account for cash dividends
17) A dividend is declared by the:
A) president of the corporation
B) board of directors
C) chief financial officer
D) corporate controller
Answer: B Diff: 1 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
18) Dividends on cumulative preferred shares of $2,500 are in arrears for 2013. During 2014, the total
dividends declared amount to $10,000. There are 6,000 shares of $1 cumulative preferred shares
outstanding and 10,000 common shares outstanding. The total amount of dividends payable to each class
of shares in 2014 amounts to:
A) $8,500 to preferred, $1,500 to common
B) $6,000 to preferred, $4,000 to common
C) $5,000 to preferred, $5,000 to common
D) $10,000 to preferred, $0 to common
Answer: A Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
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19) Dividends on cumulative preferred shares of $2,500 are in arrears for 2013 and 2014. During 2015, the
total dividends declared amount to $10,000. There are 3,000 shares of $1 cumulative preferred shares
outstanding and 10,000 common shares outstanding. The total amount of dividends payable to each class
of shares in 2015 amounts to:
A) $5,500 to preferred, $4,500 to common
B) $3,000 to preferred, $7,000 to common
C) $8,000 to preferred, $2,000 to common
D) $10,000 to preferred, $0 to common
Answer: C
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
20) Dividends on cumulative preferred shares of $2,500 are in arrears for 2012, 2013, and 2014. During
2015, the total dividends declared amount to $10,000. There are 3,000 shares of $1 cumulative preferred
shares outstanding and 10,000 common shares outstanding. The total amount of dividends payable to
each class of shares in 2015 amounts to:
A) $5,500 to preferred, $4,500 to common
B) $3,000 to preferred, $7,000 to common
C) $8,000 to preferred, $2,000 to common
D) $10,000 to preferred, $0 to common
Answer: D
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
21) Dividends were not declared by Royal Inc. in 2013 or 2014. During 2015, total dividends declared
amount to $20,000. There are 6,000 shares of $1 cumulative preferred shares outstanding and 10,000
common shares outstanding. The total amount of dividends payable to each class of shares in 2015
amounts to:
A) $18,000 to preferred, $2,000 to common
B) $6,000 to preferred, $14,000 to common
C) $12,000 to preferred, $8,000 to common
D) $10,000 to preferred, $10,000 to common
Answer: A
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
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22) Dividends were not declared by Royal Inc. in 2012. During 2013, total dividends declared amount to
$20,000. There are 6,000 shares of $1 cumulative preferred shares outstanding and 10,000 common shares
outstanding. The total amount of dividends payable to each class of shares in 2013 amounts to:
A) $18,000 to preferred, $2,000 to common
B) $6,000 to preferred, $14,000 to common
C) $12,000 to preferred, $8,000 to common
D) $10,000 to preferred, $10,000 to common
Answer: C Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
23) During 2014, total dividends declared by Par Corporation amounted to $29,000. There were 5,000
shares of $2 noncumulative preferred shares outstanding and 10,000 common shares outstanding. No
dividends were declared in 2012 or 2013. The total amount of dividends payable to each class of shares in
2014 amounted to:
A) $19,000 to preferred, $10,000 to common
B) $0 to preferred, $29,000 to common
C) $10,000 to preferred, $19,000 to common
D) $29,000 to preferred, $0 to common
Answer: C Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
24) During 2014, total dividends declared by Par Corporation amounted to $29,000. There were 5,000
shares of $2 cumulative preferred shares outstanding and 10,000 common shares outstanding. No
dividends were declared in 2012 or 2013. The total amount of dividends payable to each class of shares in
2014 amounted to:
A) $19,000 to preferred, $10,000 to common
B) $0 to preferred, $29,000 to common
C) $10,000 to preferred, $19,000 to common
D) $29,000 to preferred, $0 to common
Answer: D Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
190
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25) During 2014, total dividends declared by Jackson Corp. amounted to $29,000. There were 5,000 shares
of $2 cumulative preferred shares outstanding and 10,000 common shares outstanding. No dividends
were declared in 2013. The total amount of dividends payable to each class of shares in 2014 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $20,000 to preferred, $9,000 to common
C) $29,000 to preferred, $0 to common
D) $9,000 to preferred, $20,000 to common
Answer: B Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
26) During 2013, total dividends declared by Jackson Corp. amounted to $29,000. There were 5,000 shares
of $2 noncumulative preferred shares outstanding and 10,000 common shares outstanding. No dividends
were declared in 2012. The total amount of dividends payable to each class of shares in 2013 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $20,000 to preferred, $9,000 to common
C) $29,000 to preferred, $0 to common
D) $9,000 to preferred, $20,000 to common
Answer: A
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
27) Passed dividends on cumulative preferred shares:
A) remain a liability of the corporation until they are paid
B) are forever lost by the preferred shareholders
C) are referred to as dividends in arrears
D) are paid after common shareholders receive their dividends
Answer: C Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
28) Dividends in arrears:
A) are a liability on the balance sheet
B) are passed dividends on cumulative preferred shares
C) are never reported in the notes to the financial statements
D) are forever lost by the preferred shareholders
Answer: B Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-3 Account for cash dividends
191
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29) Magic Corp. has 20,000 shares of noncumulative, $5 preferred shares outstanding as well as 100,000
common shares. The board of directors have declared and distributed the required dividends for the past
three years, not counting the current year. The board wants to give the common shareholders a $1.25
dividend per share for the current year. The total dividends to be declared must be:
A) $225,000
B) $125,000
C) $525,000
D) $250,000
Answer: A
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
30) Newco Corporation has 20,000 shares of cumulative, $5 preferred shares outstanding as well as
100,000 common shares. As of the beginning of this fiscal year, there were three years of dividends in
arrears on the preferred shares. The board of directors wants to give the common shareholders a $1.25
dividend per share. The total dividends to be declared must be:
A) $225,000
B) $400,000
C) $525,000
D) $425,000
Answer: C
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
31) Resco Corporation has had 10,000 shares of $3, cumulative preferred shares outstanding as well as
35,000 common shares since it was incorporated. During the first, second, and third years of operations,
$15,000, $18,000 and $50,000 in dividends, respectively, were paid. The dividends paid to the common
shareholders in year three amounted to:
A) $30,000
B) $0
C) $27,000
D) $18,000
Answer: B
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
192
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32) Resco Corporation has had 10,000 shares of $3, cumulative preferred shares outstanding as well as
35,000 common shares since it was incorporated. During the first, second, and third years of operations,
$10,000, $20,000 and $80,000 in dividends, respectively, were paid. The dividends paid to the common
shareholders in year three amounted to:
A) $30,000
B) $0
C) $20,000
D) $18,000
Answer: C
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
Table 13-2
Falcon Corporation has 12,000 shares of $5, noncumulative preferred shares outstanding and 16,000
common shares outstanding. At the end of the current year, Falcon Corporation declares a dividend of
$120,000.
33) Refer to Table 13-2. How is the dividend allocated between preferred and common shareholders?
A) $12,000 to preferred, $108,000 to common
B) $80,000 to preferred, $40,000 to common
C) $60,000 to preferred, $60,000 to common
D) $40,000 to preferred, $80,000 to common
Answer: C Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
34) Refer to Table 13-2. What is the dividend per share to preferred and common shareholders?
A) $5.00 to preferred, $3.75 to common
B) $3.75 to preferred, $5.00 to common
C) $6.67 to preferred, $1.50 to common
D) $1.00 to preferred, $6.75 to common
Answer: A
Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-3 Account for cash dividends
193
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Table 13-3
Spencer Corporation has 15,000 shares of $5, cumulative preferred shares outstanding and 25,000
common shares. At the end of the current year, Spencer Corporation declares a dividend of $120,000.
Dividends of $37,500 are in arrears as of January 1 of the current year.
35) Refer to Table 13-3. How is the dividend allocated between preferred and common shareholders?
A) $112,500 to preferred, $7,500 to common
B) $75,000 to preferred, $45,000 to common
C) $120,000 to preferred, $0 to common
D) $0 to preferred, $120,000 to common
Answer: A Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Analysis
Objective: 13-3 Account for cash dividends
36) Refer to Table 13-3. What is the dividend per share to preferred and common shareholders?
A) $5.00 to preferred, $1.80 to common
B) $7.50 to preferred, $0.30 to common
C) $5.00 to preferred, $0.30 to common
D) $1.80 to preferred, $5.00 to common
Answer: B
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-3 Account for cash dividends
37) From its inception through the year of 2014, Quicksales Company was profitable and made strong
dividend payments each year. In the year 2015, Quicksales had major losses and paid no dividends. In
2016, the company started making large profits again, and was able to pay dividends to all
shareholders—both common and preferred. There are 1,500 cumulative, $7 dividend, preferred shares
outstanding. What is the total amount of dividends which should be paid to the preferred shareholders in
December 2016?
A) $210
B) $22,000
C) $10,500
D) $21,000
Answer: D
Explanation: D)
Calculations: 1,500 × $7 = $10,500
$10,500 × 2 = $21,000
Diff: 2 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
194
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38) Orleans Company was incorporated on January 1, 2012. Orleans issued 4,000 common shares and 500
preferred shares on that date. The preferred shares are cumulative, with a $8 dividend. Orleans has not
paid any dividends yet. In 2015, Orleans had its first profitable year, and on November 1, 2015, Orleans
declared a total dividend of $28,000. What is the total amount that will be paid out to common
shareholders?
A) $4,000
B) $16,000
C) $12,000
D) $28,000
Answer: C
Explanation: C)
Calculations: [(500 × $8)] × 4 = $16,000
$28,000 - $16,000 = $12,000
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
195
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Table 13-9
Following is the JenWu Corporation December 31, 2015 shareholders' equity section of the balance sheet,
prior to the closing entries:
Contributed capital:
Preferred shares, cumulative, $5.00, 6,000 shares outstanding,
liquidation value $42 per share $220,000
Common shares, 30,000 shares outstanding 500,000
Retained earnings/(deficit) (240,000)
Note: No dividends were declared in 2013 or 2014. The net income for 2015 was $260,000.
39) Referring to Table 13-9, which of the following is correct if the JenWu board of directors declares the
maximum dividend possible on the preferred shares?
A)
Dr. Retained Earnings 20,000
Cr. Preferred Dividend Payable 20,000
B)
Dr. Retained Earnings 90,000
Cr. Preferred Dividend Payable 90,000
C) No entry because there is a deficit balance in Retained Earnings.
D)
Dr. Retained Earnings 20,000
Cr. Preferred Dividend Payable 10,000
Cr. Common Dividend Payable 10,000
Answer: A
Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
196
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Match the following.
A) record date
B) dividend
C) declaration date of dividend
D) cumulative preferred shares
E) payment date of dividend
40) Distribution of equity to the corporation's shareholders
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
41) The date with respect to a cash dividend that determines which shareholder will be receiving the
dividend
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
42) The date with respect to a cash dividend where the liability is created and the retained earnings are
reduced Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
43) The date with respect to a cash dividend where the liability is reduced and the payment is made to
the shareholder Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
44) Preferred shares whose owners must receive all dividends in arrears before the corporation pays
dividends to the common shareholders.
Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-3 Account for cash dividends
Answers: 40) B 41) A 42) C 43) E 44) D
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Table 13-7
Masters Inc.
Partial Balance Sheet
December 31, 2015
Shareholders' Equity
Contributed Capital:
Preferred shares, $1.00, 100,000 shares authorized, 20,000
shares issued $ 100,000
Common shares, unlimited number of shares authorized,
100,000 shares issued 350,000
Total contributed capital 450,000
Retained earnings 170,000
Total shareholders' equity $620,000
45) Refer to Table 13-7. Assume that the preferred shares are not cumulative and that there have been no
dividends declared in 2012, 2013, and 2014. Prepare the journal entry to record the declaration and
payment of a dividend in the total amount of $25,000, on December 3, 2015. Use separate dividends
payable accounts for preferred and common shares.
Answer: General Journal
Date
2015 Accounts Debit Credit
Dec. 3 Retained Earnings 25,000
Dividends Payable-Preferred 20,000
Dividends Payable-Common 5,000
Dividends Payable-Preferred 20,000
Dividends Payable-Common 5,000
Cash 25,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
198
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46) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there have been no
dividends declared in 2012, 2013 and 2014. Prepare the journal entry to record the declaration and
payment of a dividend in the total amount of $85,000, on December 3, 2015. Use separate dividends
payable accounts for preferred and common shares.
Answer: General Journal
Date
2015 Accounts Debit Credit
Dec. 3 Retained Earnings 85,000
Dividends Payable-Preferred 80,000
Dividends Payable-Common 5,000
Dividends Payable-Preferred 80,000
Dividends Payable-Common 5,000
Cash 85,000
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
47) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there have been no
dividends declared in 2013 and 2014. Prepare the journal entry to record the declaration and payment of
a dividend in the total amount of $85,000, on December 3, 2015. Use separate dividends payable accounts
for preferred and common shares.
Answer: General Journal
Date
2015 Accounts Debit Credit
Dec. 3 Retained Earnings 85,000
Dividends Payable-Preferred 60,000
Dividends Payable-Common 25,000
Dividends Payable-Preferred 60,000
Dividends Payable-Common 25,000
Cash 85,000
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
199
© 2014 Pearson Canada Inc.
48) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there have been no
dividends declared in 2013 and 2014. A dividend in the total amount of $85,000, was declared and paid
on December 3, 2015. What was the dividend amount per share received by the common shareholders?
Answer:
Total Dividend $85,000
Dividend allocated to preferred shareholders
(20,000 shares × $ 1 × 3 years) 60,000
Dividend allocated to common shareholders (remainder) 25,000
Divided by the number of common shares outstanding 100,000
= $0.25 cents per share dividend
Diff: 3 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-3 Account for cash dividends
49) Refer to Table 13-7. Assume that the preferred shares are not cumulative and that there have been no
dividends declared in 2013 and 2014. A dividend in the total amount of $85,000, was declared and paid
on December 3, 2015. What was the dividend amount per share received by the common shareholders?
Answer:
Total Dividend $85,000
Dividend allocated to preferred shareholders
(20,000 shares × $ 1 year) 20,000
Dividend allocated to common shareholders (remainder) 65,000
Divided by the number of common shares outstanding 100,000
= $0.65 cents per share dividend Diff: 3 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-3 Account for cash dividends
50) Refer to Table 13-7. Assume that the preferred shares are cumulative and that there have been no
dividends declared in 2012, 2013, and 2014. Prepare the journal entries to record the declaration and
payment of a dividend in the total amount of $25,000, on December 3, 2015. Use separate dividends
payable accounts for preferred and common shares, if required.
Answer: General Journal
Date Accounts Debit Credit
Dec. 3 Retained Earnings 25,000
Dividends Payable-Preferred 25,000
Dividends Payable-Preferred 25,000
Cash 25,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
200
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51) A section of IRC Incorporated's balance sheet appears as follows:
IRC Incorporated
Partial Balance Sheet
December 31, 2014
Shareholders' Equity
Contributed Capital:
Preferred shares, $4.00, 10,000 shares authorized, 2,000
shares issued $ 200,000
Common shares, unlimited number of shares authorized,
10,000 shares issued 450,000
Total contributed capital 650,000
Retained earnings 378,000
Total shareholders' equity $1,028,000
a) How much in dividends must IRC Incorporated declare each year before the common shareholders
receive cash dividends for the year?
b) Assume $40,000 was paid in dividends in the year 2014. What would be the breakdown between
common and preferred dividends assuming there are no dividends in arrears?
c) How would the declaration of a $50,000 dividend affect the shareholders' equity section of IRC
Incorporated's balance sheet?
Answer:
a) (2,000 × 4) = $8,000
b) 40,000 - (2,000 × 4) = $32,000 Common = $32,000. Preferred = $8,000.
c) Retained earnings and total shareholders' equity would decrease by $50,000. Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
201
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52) Mowat Corporation reported a net loss in 2012, its first year of operations, of $15,460; a net loss in
2013 of $12,350; and a net income of $152,700 in 2014. Mowat Corporation had outstanding throughout
the three-year period the following issuances of shares:
$5, cumulative preferred shares, 175 shares issued $ 17,500
Common shares, 5,000 shares issued 100,000
No dividends were declared in 2012 or 2013.
a) What is the amount of dividends in arrears at the beginning of 2014?
b) Assume that at the end of 2014, dividends of $70,025 were declared and paid. What total amount of
dividends is paid to preferred shareholders and what total amount of dividends is paid to common
shareholders?
c) What is the dividend per share paid to the preferred and common shareholders in 2014?
d) Prepare journal entries to declare and pay the dividends in 2014.
Answer:
a) $5 × 2 × 175 = $1,750
b) $5 × 3 × 175 = $2,625 preferred
$70,025 - $2,625 = $67,400 common
c) $2,625/175 = $15 preferred
$67,400/5,000 = $13.48 common
d) General Journal
Date Accounts Debit Credit
Dec. 31 Retained Earnings 70,025
Dividends Payable-Preferred 2,625
Dividends Payable-Common 67,400
Dividends Payable-Preferred 2,625
Dividends Payable-Common 67,400
Cash 70,025
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
202
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53) During 2011-2015, Warren Corporation had the following issuances of shares outstanding for the
entire period:
25,000 $5, cumulative preferred shares
50,000 common shares
Cash dividends declared by the board of directors during 2011-2015 were as follows:
2011 none
2012 $125,000
2013 $150,000
2014 $150,000
2015 $250,000
Compute the amount of total dividends and dividends per share payable to each class of shares during
2001-2015.
Year Total PreferredPer Share
PreferredTotal Common
Per Share
Common
Answer:
Year Total PreferredPer Share
PreferredTotal Common
Per Share
Common
2011 $0 $0 $0 $0
2012 $125,000 $5 $0 $0
2013 $150,000 $6 $0 $0
2014 $150,000 $6 $0 $0
2015 $200,000 $8 $50,000 $1
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
203
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54) Bueno Corporation has 15,500 shares of $4, cumulative preferred shares outstanding as well as 80,000
common shares. There are no dividends in arrears on the preferred shares. The following transactions
were reported during December 2014:
Dec. 1 Declared the required dividend on the preferred shares and a $0.75 per
share dividend on the common shares.
14 The date of record for the dividend declared on December 1.
28 Paid the dividend declared on December 1.
31 Closed out the income summary account. Net income for the year was $345,000.
a) Prepare journal entries to record the above transactions.
b) Assuming the balance of retained earnings on January 1, 2014, was $49,800, determine the balance of
retained earnings on December 31, 2014.
Date Accounts Debit Credit
Answer:
Date Accounts Debit Credit
Dec. 1 Retained Earnings 122,000
Dividends Payable-Preferred 62,000
Dividends Payable-Common 60,000
28 Dividends Payable-Preferred 62,000
Dividends Payable-Common 60,000
Cash 122,000
31 Income Summary 345,000
Retained Earnings 345,000
b) $49,800 + $345,000 - $122,000 = $272,800 Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
204
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Table 13-8
The shareholders' equity section of the balance sheet of Crestor Ltd. follows:
Contributed capital:
Preferred shares, cumulative, $3, 4,000 shares outstanding, $200,000
Common shares, 20,000 shares outstanding 300,000
Retained earnings 138,250
55) Refer to Table 13-8. Assume that there were no dividends declared for the last two years. What is the
total amount of the dividends that must be declared this year for the common shareholders to get a $1 per
share dividend?
Answer:
Common shares outstanding 20,000 × $1 $20,000
Preferred shares dividend $3 × 4,000 × 3 years 36,000
Total dividend required: $56,000
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
56) Refer to Table 13-8. Assume that there were no dividends declared last year. What is the total amount
of the dividends that must be declared this year for the common shareholders to get a $2 per share
dividend?
Answer:
Common shares outstanding 20,000 × $2 $40,000
Preferred shares dividend $3 × 4,000 × 2 24,000
Total dividend required: $64,000
Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
57) Refer to Table 13-8. Assume that there are no dividends in arrears. What is the total amount of the
dividends that must be declared this year for the common shareholders to get a $3 per share dividend?
Answer:
Common shares outstanding 20,000 × $3 $60,000
Preferred shares dividend $3 × 4,000 12,000
Total dividend required: $72,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
205
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58) Vitacom Technologies Corp. reports the following shareholders' equity as of December 31, 2014:
Preferred shares, $5 cumulative, 200,000 shares authorized,
90,000 shares issued $ 5,400,000
Common shares, 500,000 shares authorized,
200,000 shares issued 2,750,000
Total contributed capital 8,150,000
Retained earnings 3,400,000
Total shareholders' equity $11,550,000
Determine the following:
a) What was the average issue price per common share?
b) What was the average issue price per preferred share?
c) Assume net income for 2014 was $825,000. Journalize the entry to close net income to retained
earnings.
d) Assume the board of directors declares dividends of $1,850,000 in 2014. No dividends were declared
in 2013. Calculate the amount per share each class of shares will receive.
Answer:
a) ($2,750,000)/200,000 = $13.75
b) ($5,400,000)/90,000 = $60
c) General Journal
Date Accounts Debit Credit
Dec. 31 Income Summary 825,000
Retained Earnings 825,000
d) ($5 × 2) = $10 preferred ($10 × 90,000) = $900,000
$1,850,000 - $900,000 = $950,000
$950,000/200,000 = $4.75 common Diff: 3 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
206
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59) Following is the shareholders' equity section of the balance sheet for Phototron Incorporated as of
December 1, 2014:
Preferred shares, $6 cumulative,
6,500 shares issued $ 650,000
Common shares, 120,000 shares issued 1,620,000
Retained earnings 467,200
Total shareholders' equity $2,737,200
Phototron Incorporated reports the following transactions for December 2014:
Dec. 1 Declared the required cash dividend on the preferred shares and
a $0.50 dividend on the common shares.
11 Paid the dividends declared on December 1.
15 Sold 5,000 common shares for $15 per share.
For each transaction, show the dollar amount of the effect of each transaction on the following accounts:
common shares and retained earnings. Write "no effect" if an account is unaffected by a transaction.
Date Common
Shares
Retained
Earnings
Answer:
Date Common
Shares
Retained
Earnings
Dec. 1 no effect ($99,000) *
11 no effect no effect
15 $75,000 no effect
* (6,500 × $6) = $39,000
($0.50 × 120,000) = 60,000
Total dividends $99,000 Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
207
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Table 13-11
The following accounts and related balances of ETH Engineering Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Trademark, net $ 17,000
Preferred Shares, $2.50, 20,000 authorized and issued 200,000
Cash 320,000
Accounts Receivable, net 265,000
Accrued Liabilities 42,000
Long-term Note Payable 500,000
Inventory 350,000
Retained Earnings/(Deficit) (1,197,000)
Accounts Payable 75,000
Interest Expense 35,000
Property, Plant, and Equipment, net 2,800,000
Common Shares, 300,000 shares authorized; 175,000 shares
issued 3,500,000
Prepaid Expenses 3,000
Organization Costs 15,000
Additional information:
Total Assets, January 1, 2014 $ 3,200,000
Net income for 2014 $ 650,000
No new shares were issued in 2014.
60) Referring to Table 13-11, prepare journal entries for the following transactions:
Dec 31 Close the income summary account
Dec 31 The entry to record amortizing $3,000 of the organization costs
Dec 31 The entry to record the declaration of a $60,000 cash dividend. Assume that there is a positive
balance in retained earnings sufficient for the dividend.
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Journal
Date Description Debit Credit
Answer: Journal
Date Description Debit Credit
Dec 31 Income Summary 650,000
Retained Earnings 650,000
Dec 31 Amortization Expense, Org. Costs 3,000
Organization Costs 3,000
Dec 31 Retained Earnings 60,000
Preferred Dividend
Payable 50,000
Common Dividend Payable 10,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
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Table 13-12
The following accounts and related balances of FYI Advertising Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Accrued Liabilities $ 50,400
Preferred Shares, $2.50, cumulative, 24,000 authorized and
issued 240,000
Prepaid Expenses 3,600
Accounts Payable 90,000
Trademark, net 20,400
Long-term Note Payable 600,000
Property, Plant, and Equipment, net 3,360,000
Retained Earnings 623,600
Accounts Receivable, net 318,000
Interest Expense 29,000
Inventory 420,000
Common Shares, 300,000 shares authorized; 200,000 shares
issued 2,500,000
Cash 384,000
Organization Costs 18,000
Additional information:
Total Assets, January 1, 2014 $ 4,100,000
Net income for 2014 $ 420,000
No new shares were issued in 2014.
61) Referring to Table 13-12, prepare journal entries for the following transactions:
Dec 31 Close the income summary account
Dec 31 The entry to record amortizing $4,000 of the organization costs
Dec 31 The entry to record the declaration of a $80,000 cash dividend.
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Journal
Date Description Debit Credit
Answer: Journal
Date Description Debit Credit
Dec 31 Income Summary 420,000
Retained Earnings 420,000
Dec 31 Amortization Expense, Org. Costs 4,000
Organization Costs 4,000
Dec 31 Retained Earnings 80,000
Preferred Dividend
Payable 60,000
Common Dividend Payable 20,000
Diff: 2 Type: SA
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-3 Account for cash dividends
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Objective 13-4
1) Market value is a term referring to common shares and indicates the amount for which a person could
buy or sell a share.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
2) Book value of a share is the total assets divided by the number of outstanding shares.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
3) Dividends in arrears on preferred shares are part of shareholders' equity allocated to preferred
shareholders.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
4) The following information is available for the Barber Corporation as of December 31, 2014:
Preferred shares, cumulative, $10, 1,000 shares authorized and
issued $100,00
Common shares, 4,000 shares authorized and issued 400,000
Retained earnings 100,000
Barber Corporation did not declare a dividend in 2013 or 2014. The liquidation value of the preferred
shares is $100 per share. Prior to 2013, there were no dividends in arrears. Compute book value per share
for preferred shares and common shares.
A) $110 for preferred, $185 for common
B) $120 for preferred, $182.50 for common
C) $100 for preferred, $187.50 for common
D) $120 for preferred, $120 for common
Answer: D Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
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5) The following information is available for the Frasier Corporation as of December 31, 2015:
Preferred shares, $10, cumulative, 1,000 shares authorized and
issued $100,00
Common shares, 6,000 shares authorized and issued 500,000
Retained earnings 750,000
Frasier Corporation declared a dividend in 2015 amounting to $5,000. No dividends were declared in
2014. The liquidation value of the preferred stock is $100 per share. Prior to 2014, there were no dividends
in arrears. Compute book value for preferred shares and common shares in total.
A) $125,000 for preferred, $1,225,000 for common
B) $105,000 for preferred, $1,245,000 for common
C) $120,000 for preferred, $1,230,000 for common
D) $115,000 for preferred, $1,235,000 for common
Answer: D Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
6) For a company that has only common shares outstanding, dividing total shareholders' equity by the
number of shares outstanding determines the:
A) book value per share
B) liquidation value per share
C) redemption value per share
D) market value per share
Answer: A Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
7) The book value of preferred shares is equal to:
A) liquidation value minus any dividends in arrears
B) liquidation value plus any dividends in arrears
C) market value minus any dividends in arrears
D) market value plus any dividends in arrears
Answer: B
Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
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Table 13-4
The shareholders' equity section of the balance sheet of Cresco Corporation follows:
Contributed capital:
Preferred shares, cumulative, $3.50, 4,000 shares outstanding,
liquidation value $56 per share $210,000
Common shares, 20,000 shares outstanding 397,500
Retained earnings 138,250
Note: There are two years dividends in arrears on the preferred shares, including the current year.
8) Refer to Table 13-4. The book value per share for preferred shares is:
A) $52.50
B) $56.00
C) $63.00
D) $59.50
Answer: C
Explanation: C) [(2 × $3.50 × 4,000) + (4,000 × $56)]/4,000 = $63 Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
9) Refer to Table 13-4. The book value per share for common shares is:
A) $19.88
B) $24.69
C) $26.79
D) $25.39
Answer: B
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
10) Pratt Corporation's balance sheet for 2014 reveals total shareholders' equity of $2,500,000. There are
10,000 shares of cumulative, $10 preferred shares outstanding and 50,000 common shares outstanding. To
date, dividends in arrears for the preferred shares amount to $25,000. The liquidation value of the
preferred shares is $105 per share. Book value per share of common shares is:
A) $28.75
B) $29.50
C) $28.50
D) $29.00
Answer: C Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
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11) Cooper Corporation's balance sheet for 2013 reveals total shareholders' equity of $2,500,000. There are
10,000 shares of noncumulative, $10 preferred shares outstanding and 50,000 common shares
outstanding. The liquidation value of the preferred shares is $105 per share. Book value per share of
common shares is:
A) $29.00
B) $29.50
C) $28.50
D) $28.75
Answer: A
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
Table 13-6
The following selected list of accounts with their normal balances was taken from the general ledger of
Gore Ltd. as of December 31, 2014:
Cash $199,000
Common shares, 10,000 shares authorized, 5,000 shares issued 265,000
Retained earnings 131,5000
Cash dividends payable 20,000
Preferred shares, 500,000 shares authorized 100,000 shares
issued 800,000
12) Refer to Table 13-6. The average issue price of a common share was:
A) $20.00
B) $26.50
C) $53.00
D) $30.00
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
13) Refer to Table 13-6. The average issue price of a preferred share was:
A) $1.60
B) $20.00
C) $40.00
D) $8.00
Answer: D Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Analysis
Objective: 13-4 Use different share values in decision making
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Table 13-9
Following is the JenWu Corporation December 31, 2015 shareholders' equity section of the balance sheet,
prior to the closing entries:
Contributed capital:
Preferred shares, cumulative, $5.00, 6,000 shares outstanding,
liquidation value $42 per share $220,000
Common shares, 30,000 shares outstanding 500,000
Retained earnings/(deficit) (240,000)
Note: No dividends were declared in 2013 or 2014. The net income for 2015 was $260,000.
14) Referring to Table 13-9, what is the book value per share of the preferred shares on December 31, 2015
assuming no dividends were declared?
A) $5.00
B) $36.67
C) $42.00
D) $57.00
Answer: D
Explanation: D) $42 + (3 × $5) = $ 57 Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-4 Use different share values in decision making
15) Referring to Table 13-9, what is the book value per share of the common shares on December 31, 2015
assuming no dividends were declared?
A) $500,000
B) $398,000
C) $260,000
D) $520,000
Answer: B
Explanation: B) $220,000 + $500,000 + $20,000 - (6,000 × $57) = $398,000 Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-4 Use different share values in decision making
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16) The shareholders' equity section of the Jiminy Corporation on December 31, 2013 balance sheet
follows:
Contributed capital:
Preferred shares, cumulative, $3.00, 4,000 shares outstanding
liquidation value $48 per share $180,000
Common shares, 50,000 shares outstanding 500,000
Retained earnings/(deficit) (100,000)
As of December 31st 2013 there was a total of two years of dividends in arrears on the preferred shares.
What is the book value per share of the common shares on December 31, 2013?
A) $7.28
B) $10.00
C) $8.00
D) $7.52
Answer: A
Explanation: A) [($180,000 + $500,000 - $100,000) - 216,000*]/50,000 shares = $7.28 per share
* Book value of preferred shares = ($3 × 4,000 × 2) + (4,000 × $48) = $216,000 Diff: 3 Type: MC
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Application
Objective: 13-4 Use different share values in decision making
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Match the following.
A) market value
B) book value
17) Amount of shareholders' equity on the company's books for each share of its stock.
Diff: 1 Type: MA
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
18) The price for which a person could buy or sell a share
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-4 Use different share values in decision making
Answers: 17) B 18) A
19) Sibley Corporation's balance sheet reported the following shareholders' equity at December 31, 2014:
Preferred shares, $3, cumulative, 11,000 shares
issued, liquidation value $55 per share $ 605,000
Common shares, 75,000 shares issued 2,000,000
Total contributed capital 2,605,000
Retained earnings 550,000
Total shareholders' equity $3,155,000
Assuming there are two years dividends in arrears (including 2014), determine the book value per share
of both preferred and common shares.
Answer: ($3 × 2 years) = $6 + $55 = $61 preferred
($61 × 11,000) = $671,000
$3,155,000 - $671,000 = $2,484,000
$2,484,000/75,000 = $33.12 common Diff: 2 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-4 Use different share values in decision making
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20) Define and contrast each of the following share values:
∙ market value
∙ book value
Answer: Market value is the price for which a share could be bought or sold. Usually, it is the most
important value to the shareholder.
Book value is the amount of shareholders' equity on the company's books for each share. Preferred shares
book value is calculated first and then common shares book value is determined by dividing
shareholders' equity available to common shareholders by the average number of common shares. Diff: 2 Type: ES
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 13-4 Use different share values in decision making
21) With regard to common shares differentiate market value from book value. How is book value per
common share calculated?
Answer: Market value is the price for which a share may be bought or sold. Book value is the amount of
shareholders' equity attributable to the common shareholders.
The book value per common share is the shareholders' equity attributable to the common shareholders
divided by the number of outstanding shares. When there are outstanding preferred shares the amount of
shareholders' equity book value available to the common shares is reduced by the preferred shareholders'
liquidation value and dividends in arrears.
Diff: 2 Type: ES
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 13-4 Use different share values in decision making
Objective 13-5
1) Two common profitability measures are rate of return on total assets and rate of return on common
shareholders' equity.
Answer: TRUE
Diff: 1 Type: TF
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
2) The groups that invest money to finance a corporation are the shareholders and creditors.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
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3) Borrowing at a lower rate than the return on investments is called using leverage.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
4) The ________ measures a company's success in using its assets to earn income for the stakeholders who
are financing the business.
A) return on assets
B) return on equity
C) current ratio
D) debt-to-equity ratio
Answer: A
Diff: 1 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
5) The formula for computing return on assets is:
A) (net income plus interest expense)/average total assets
B) (net income plus preferred dividends)/average total assets
C) (net income less total assets)/average shareholders' equity
D) (net income plus total assets)/average shareholders' equity
Answer: A Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
6) The formula for computing return on equity is:
A) (net income less interest expense)/average shareholders' equity
B) (net income less preferred dividends)/average common shareholders' equity
C) (net income plus preferred dividends)/shareholders' equity at the end of the period
D) (net income plus interest expense)/average common shareholders' equity
Answer: B
Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
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Table 13-5
The following information is available for Jansen Corporation for the current year:
Net income $156,000
Preferred dividends 24,000
Interest expense 17,500
Beginning of year:
Total assets 850,000
Total liabilities 375,000
Total common shareholders' equity 395,000
End of year:
Total assets 930,000
Total liabilities 405,000
Total common shareholders' equity 435,000
7) Refer to Table 13-5. The return on assets for Jansen Corporation was:
A) 19.5%
B) 18.7%
C) 17.5%
D) 16.8%
Answer: A Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
8) Refer to Table 13-5. The return on equity for Jansen Corporation was:
A) 30.3%
B) 31.8%
C) 35.9%
D) 37.6%
Answer: B
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
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9) Sheffield Company had $42,000 of net income in 2013. Equity at the beginning of the year was
$1,200,000 and at the end of the year was $1,600,000. Sheffield has no preferred shares. Calculate the rate
of return on common shareholders' equity. (Round to 3 decimal places.)
A) 0.035
B) 0.026
C) 0.030
D) 0.032
Answer: C
Explanation: C) Calculations: $42,000/ [($1,200,000 + $1,600,000)/2] = 0.030
Diff: 2 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
10) The rate of return on total assets and the rate of return on common shareholders' equity are used to
evaluate the:
A) profitability of the business.
B) liquidity of the business.
C) ability to pay current liabilities with current assets.
D) cash flow of the business.
Answer: A
Diff: 1 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 13-5 Evaluate a company's ROA and ROE
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Table 13-10
Samson Ltd. reported the figures shown below for 2013 and 2014:
2013 2014
Income statement:
Interest expense $ 13,000 $ 14,000
Net income 176,000 182,000
Balance sheet:
Total assets 897,000 952,000
Preferred shares, $2.00, cumulative, $80 liquidation value,
1,500 shares outstanding 112,500 112,500
Common shares, 25,000 outstanding 488,000 524,000
Retained earnings 65,000 85,000
Dividends on the preferred share have not been declared for 2013 and 2014.
11) Referring to Table 13-10, what is the rate of return on common shareholders' equity for 2014?
A) 15.4%
B) 30.8%
C) 26.2%
D) 17.7%
Answer: B
Explanation: B) ($182,000 - $3,000)/[($488,000 + $524,000 + $65,000 + $85,000) /2] = 0..3081
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
12) Referring to Table 13-10, what is the rate of return on total assets for 2014?
A) 20.6%
B) 21.2%
C) 19.7%
D) 19.1%
Answer: B
Explanation: B) ($182,000 + $14,000)/[($897,000 + $952,000)/2] = 0.0212
Diff: 3 Type: MC
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
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Match the following.
A) return on assets
B) return on equity
C) leverage
13) Net income less preferred dividends divided by average common shareholders' equity Diff: 1 Type: MA
Learning Outcome:
A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
14) The sum of net income plus interest expense divided by average total assets
Diff: 1 Type: MA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
15) Using borrowed money to make an investment
Diff: 1 Type: MA
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
Objective: 13-5 Evaluate a company's ROA and ROE
Answers: 13) B 14) A 15) C
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16) Gleason Corporation has gathered the following data for the current year:
Net Income $40,000
Interest Expense 5,000
Income Tax Expense 12,500
Preferred Dividends 3,600
Beginning End of
of Year Year
Current assets $ 68,000 $ 81,000
Current liabilities 41,000 39,000
Property, plant, and equipment 340,000 365,000
Long-term liabilities 100,000 90,000
Common shareholders' equity 217,000 267,000
Preferred shareholders' equity 50,000 50,000
a) Calculate the current ratio at year end.
b) Calculate return on assets.
c) Calculate return on equity.
d) Comment on how these measures are used.
Answer:
a) $81,000/$39,000 = 2.08
b) $40,000 + $5,000 = $45.000; $45,000/$427,000* = 10.5%
* $68,000 + $340,000 = $408,000
$81,000 + $365,000 = $446,000
$408,000 + $446,000 = $854,000; $854,000/2 = $427,000
c) $40,000 - $3,600 = $36,400; $36,400/$242,000* = 15%
* $217,000 + $267,000 = $484,000; $484,000/2 = $242,000
d) The current ratio is used as a measure of liquidity, with 2.0 being somewhat of a standard.
The return on assets is used as a standard profitability measure that shows the company's success in
using its assets to generate income. It helps investors compare one company to another especially within
the same industry.
The return on equity is used as a standard profitability measure, which shows the relationship
between net income and average common shareholders' equity. The higher the rate of return, the more
successful the company.
Diff: 3 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
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Table 13-11
The following accounts and related balances of ETH Engineering Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Trademark, net $ 17,000
Preferred Shares, $2.50, 20,000 authorized and issued 200,000
Cash 320,000
Accounts Receivable, net 265,000
Accrued Liabilities 42,000
Long-term Note Payable 500,000
Inventory 350,000
Retained Earnings/(Deficit) (1,197,000)
Accounts Payable 75,000
Interest Expense 35,000
Property, Plant, and Equipment, net 2,800,000
Common Shares, 300,000 shares authorized; 175,000 shares
issued 3,500,000
Prepaid Expenses 3,000
Organization Costs 15,000
Additional information:
Total Assets, January 1, 2014 $ 3,200,000
Net income for 2014 $ 650,000
No new shares were issued in 2014.
17) Referring to Table 13-11, calculate the following for 2014:
1. Rate of return on total assets
2. Rate of return on common shareholders' equity
3. Current ratio
Answer:
1. Rate of return on total assets
($650,000 + $35,000)/[($3,770,000+ $3,200,000)/2] = 19.7%
2. Rate of return on common shareholders' equity
(($650,000 - ($2.50 × 20,000))/[($3,500,000 - 547,000) + ($3,500,000 - $1,197,000)/2] = 22.8%
3. Current ratio
$938,000 / $117,000 = 8.02:1
Diff: 3 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
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Table 13-12
The following accounts and related balances of FYI Advertising Ltd. are as at December 31, 2014 prior to
the closing journal entries.
Accrued Liabilities $ 50,400
Preferred Shares, $2.50, cumulative, 24,000 authorized and
issued 240,000
Prepaid Expenses 3,600
Accounts Payable 90,000
Trademark, net 20,400
Long-term Note Payable 600,000
Property, Plant, and Equipment, net 3,360,000
Retained Earnings 623,600
Accounts Receivable, net 318,000
Interest Expense 29,000
Inventory 420,000
Common Shares, 300,000 shares authorized; 200,000 shares
issued 2,500,000
Cash 384,000
Organization Costs 18,000
Additional information:
Total Assets, January 1, 2014 $ 4,100,000
Net income for 2014 $ 420,000
No new shares were issued in 2014.
18) Referring to Table 13-12, calculate the following for 2014:
1. Rate of return on total assets
2. Rate of return on common shareholders' equity
3. Current ratio
Answer:
1. Rate of return on total assets
($420,000 + $29,000)/[($4,524,000+ $4,100,000)/2] = 10.4%
2. Rate of return on common shareholders' equity
(($420,000 - ($2.50 × 24,000))/[($2,500,000 + 1,043,600) + ($2,500,000 + 623,600)/2] =10.8%
3. Current ratio
$1,125,600 / $140,400 = 8.02:1
Diff: 3 Type: SA
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 13-5 Evaluate a company's ROA and ROE
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Objective 13-6
1) With respect to share capital, the primary difference between accounting standards for private
enterprises (ASPR) and international financial reporting standards (IFRS) is the required disclosure.
Answer: TRUE Diff: 1 Type: TF
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital
2) Under the Accounting Standards for Private Enterprises (ASPE), organization costs are expensed but
under the International Financial Reporting Standards (IFRS), they are capitalized.
Answer: FALSE Diff: 2 Type: TF
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital
3) Under IFRS, companies must make certain disclosures about all classes of shares authorized by the
corporation, whether those classes of shares have been issued or not. The requirements under ASPE only
require that disclosure be made for classes of shares that have actually been issued.
Answer: TRUE Diff: 2 Type: TF
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital
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4) Allegheny Corporation is a publicly traded Canadian company that was incorporated in 2014. Legal
fees relating to incorporation amounted to $21,500 and various corporate registration costs amounted to
$3,500. Which of the following journal entries correctly records these costs.
A)
Dr. Organization Costs (asset) 25,000
Cr. Cash 25,000
B)
Dr. Organization Costs Expense 25,000
Cr. Cash 25,000
C)
Dr. Organization Costs (asset) 3,500
Dr. Legal Fees Expense 21,500
Cr. Cash 25,000
D)
Dr. Organization Costs (asset) 21,500
Dr. Corporate Registration Costs Expense 3,500
Cr. Cash 25,000
Answer: B
Explanation: B) Public company uses IFRS so organization costs are expensed.
Diff: 3 Type: MC
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Application
Objective: 13-6 Identify the impact of IFRS on share capital
5) Under International Financial Reporting Standards (IFRS), organization costs are classified as
A) an expense.
B) a current asset.
C) an intangible asset.
D) property, plant and equipment.
Answer: A Diff: 2 Type: MC
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital
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© 2014 Pearson Canada Inc.
Match the following.
A) intangible asset
B) expense
6) The account classification of organization costs under IFRS
Diff: 1 Type: MA
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital
Answers: 6) B
7) How does accounting for share capital under international financial reporting standards (IFRS) differ
from that required under accounting standards for private enterprises (ASPE)?
Answer: The primary difference in the two sets of accounting standards has to do with the required
disclosure for share capital. Under IFRS, companies must make disclosures about all classes of shares
authorized by the corporation. The requirements under ASPE are less rigorous - they only require
disclosure for classes of shares that have actually been issued.
Another difference exists in how organization costs are treated. As shown in the chapter, organization
costs are capitalized under ASPE–recorded as an intangible asset–and then amortized. Under IFRS, these
costs are expensed. Diff: 2 Type: ES
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 13-6 Identify the impact of IFRS on share capital